December 13, 2018

Political Uncertainties Influence British Pound

Markets have been extremely volatile during the past two months. Fears of a U.S. and global economic slowdown have risen as concerns surrounding trade and rising interest rates have caused global equities, interest rates and commodity prices to move sharply lower.

While the U.S. dollar index (DXY) has remained relatively steady during this time, many currencies have weakened. One of the weakest of the major currencies during this time has been the British pound, hitting yearly lows. This past week has been another turbulent and dramatic week centered on the Brexit vote in Parliament.

Earlier this week, Prime Minister Theresa May decided to delay a parliamentary vote on the United Kingdom's withdrawal agreement with the European Union. PM May made this decision to delay the vote despite criticism from Parliament, including from those in her own party. The vote on the withdrawal agreement has been pushed back to later in the month. In addition, the European Court of Justice ruled that the UK could cancel Brexit unilaterally.

This led PM May's own Conservative Party to call a confidence motion on Wednesday. She won with 200 votes, though 117 voted against her. On one hand, this situation raises fears that the hurdle needed for May to get her deal through Parliament is very high. On the other hand, PM May can't be formally challenged again for 12 months.

The UK is just one example of many other Western European countries such as France, Germany and Italy, where we see populism, globalization and economic nationalism all clashing, creating political and economic uncertainties and volatility.

Our View: We anticipate more of the same in 2019 with extreme volatility in both the markets and in politics. The two largest world economies - the U.S. and China - are locked in a geopolitical battle that will have ripple effects for the global economy. Political leaders will continue to be challenged and questioned as they try to thread the needle between nationalism and globalization. This will continue to have impacts on all asset classes next year, with particular impact on trade flows and supply chains.

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